China's electric vehicle (EV) industry has endured a two-year price war, leading to significant profit compression across the supply chain. Automakers have slashed costs to defend their market share, but this strategy has intensified upstream financial strain. Suppliers face cash flow crises, disrupting component stability and driving up costs, creating a self-perpetuating cycle of instability.
In December 2024, Ji Yue Auto, a Baidu-backed EV startup, suffered a sudden funding chain collapse, capturing widespread industry attention. Analysts and reports quickly dissected the company's overnight downfall, highlighting financial mismanagement and systemic challenges.
Ji Yue's collapse is not a standalone incident in China's EV sector. Other manufacturers, including Enovate and Bordrin, have faced comparable financial crises, underscoring the precarious state of the industry's funding ecosystem.
Aggressive price cuts have become a necessity for automakers seeking to attract buyers, further eroding corporate profits. Compounding the issue, the EV sector's heavy reliance on external financing is increasingly unsustainable as market volatility deters investors, leaving many firms struggling to secure critical operational funds.
China's automotive supply chain has grown rapidly in recent years, with rising revenues and expanding profit margins. However, the industry is now facing unprecedented challenges, particularly in the EV segment, where structural issues threaten long-term stability.
EV companies are under immense pressure from soaring R&D costs and ongoing price wars. Ji Yue Auto exemplifies these challenges, posting negative gross margins of CNY50,000 (approx. US$ 6,878) per vehicle and cumulative losses exceeding CNY10 billion in 2024.
Low gross margins have severely constrained Ji Yue Auto's ability to generate revenue or attract external financing. Despite multiple funding rounds from key shareholders Baidu and Geely, the company failed to reverse its losses, prompting shareholder exits and a complete funding collapse.
Ji Yue exacerbated its financial woes by extending payment terms to Geely, its primary shareholder and contract supplier, from 45 to 90 days. This delay resulted in debts exceeding CNY3 billion and ultimately led Geely to halt production. Initially tasked with supporting Baidu's EV ambitions, Geely faced mounting strain as it managed its extensive portfolio of brands, including Geometry, Lynk & Co, Radar Auto, and Zeekr.
Note: The payment terms offered by Chinese automakers to suppliers are approximately twice as long as those of European and Japanese automakers, passing price competition pressure onto the upstream supply chain.
Prolonged payment terms and erratic order volumes are creating systemic risks for loss-making companies like Ji Yue Auto. These challenges cascade through the supply chain, amplifying financial instability at every level.
In the first three quarters of 2024, publicly listed Chinese automakers had an average payment term of 182 days—double that of global competitors. Leading EV players like BYD, XPeng, and Nio exceeded 180 days, while Haima and BAIC BluePark extended payment terms to 298 and 252 days, respectively. These prolonged delays in receivables strain suppliers' cash flows, creating severe capital turnover challenges.
By contrast, international automakers adhere to significantly shorter payment terms, typically within 60 days. BMW averages 42 days, Toyota 53 days, and Honda as low as 32 days, offering suppliers much-needed financial stability.
The financial crisis at Ji Yue Auto intensifies the EV industry's ongoing price war while imposing additional strain on the supply chain. This vicious cycle threatens to trigger a domino effect, potentially leading to the collapse of weaker automakers.
